Buying Process

Fantastic – you’re buying a new home! Congratulations!! What a wonderful decision. Well, it’s a big job and it can be a lot of fun – especially if you are working with a good real estate agent and have a thorough understanding of the entire buying process.

Selecting a Realtor® and Company

Let’s talk first about selecting your real estate agent and their company affiliation. Naturally, you will want to deal with someone you are compatible with and who will represent you and your best interests through this entire process – whether it goes smoothly or whether you encounter many challenges along the way. My best advice is to make sure that you are compatible with the agent you choose. There should be an obvious level of comfort and trust with this person. You should never feel pressured into working with an agent or dislike anything about them. Everybody has their own tastes and preferences in who they can work with. Be cautious of anyone that makes a lot of grand promises – you are likely to be disappointed. Spend some time looking for a good match and trust your instincts.

Let us diverge slightly for a moment and talk a little about the two terms that are used throughout this presentation: REALTOR® and real estate agent – I will be using them pretty much interchangeably – for the sake of variety and readability, but there is an important distinction to make. In order to become licensed as a real estate agent, you must satisfy certain educational requirements and pass two licensing exams – one for the State and one for National – a process that many people find rather frustrating and challenging. In order to maintain that license there are further continuing education requirements (24 hours every 2 years) and a few other hoops to jump through. Being a REALTOR® is an additional distinction. That designation means that the real estate agent belongs to the National Association of REALTORS® (NAR) and their state and local chapters, in this case – the District of Columbia Association of REALTORS®, the Maryland Association of REALTORS® and, the Greater Capital Area Association of REALTORS® (GCAAR).

The REALTOR® membership means a lot of other things, but perhaps most importantly to you – it means that the person subscribes to a Code of Ethics. When you employ a REALTOR®, know that they are bound by that code and, by law, they owe you – their client – what’s known as Fiduciary Duty. And, by definition, fiduciary duty means the following:

• Confidentiality – clients personal information is held in confidence,
• Accounting – accurate accounting to all parties for all monies accepted by agent,
• Reasonable Skill and Care – agent will perform duties professionally and competently,
• Loyalty – the client’s interest is above the agent’s interest,
• Obedience – client instructions will be followed as long as they do not violate the law, and
• Disclosure – full disclosure to potential buyers of any material defect in the property.

In addition, the concept of fiduciary duty encompasses the requirement for Fair Dealing, Honesty, Good Faith, Competency, and Full Disclosure to all parties. Enough about REALTORS® for now. I just want to suggest to you that I think it is very important that you seek professional assistance when you are a home buyer. And, I am suggesting that at least part of that assistance come from a REALTOR® – not just the typical real estate agent.

You may also find it beneficial to seek the advice and counsel of other professionals, like an accountant, and/or an attorney, and/or an appraiser. Find people that you like, that you feel are knowledgeable and competent. People that you can work with, spend many hours with, and ones that will truly put your interests first.

Money, Money, Money

So, you have a good REALTOR® to help you – now it’s time to help yourself. What’s the first step? Find out how much you can afford and how much borrowed money you can get approved for, based on your financial profile. Of course this assumes that you will need a loan at all – that you are not going to be paying cash.

Why not wait and find the house you want to buy first? Well, for several reasons this may not be in your best interest and it is just not a very practical approach. Here’s why. Let’s assume that you have the wisdom to find a real estate agent to assist you in the search for your new home. Let’s further assume that you find not only a real estate agent, but you find one that is a Realtor (a member in good standing with the National Association of Realtors) and one that has the professional designation of Accredited Buyer’s Representative (ABR). And though a good Realtor and ABR would likely encourage you to obtain the loan pre-approval before you start looking, let’s assume that you don’t like that idea. You’re excited and want to begin looking at houses now.

Naturally, you will have to decide what basic parameters or search criteria to start with. What part of town, how many bedrooms, one story or two, and any other basic amenities you may need or desire. Oh, but wait a minute, you will also have to decide what price range. On what will you base that decision, if not on how much you can afford? Certainly you are free to buy a home that is less expensive than one that you can afford, but how can you buy one that is more expensive than you can get loan approval to buy?

So, before we even get started, we cannot determine where to begin looking. Why exert the time, energy and expense of looking at houses that you may not be able to afford? Would that be fair to your Realtor? And, would it serve the interest of the sellers of the homes you are looking through that you cannot afford. Remember too, that they are likely to be represented by a Realtor who has some responsibility to ensure that only qualified buyers are coming through their homes. Then too, of what value is it to find the home of your dreams only to be heartbroken to find out you cannot qualify for the necessary financing.

So, let’s do it the right way. Simply contact several lenders – do some shopping. Find out what kinds of interest rates and terms are currently available. Select one or two lenders that appeal to you and have them get you pre-approved. In most cases, the cost of getting that pre-approval is minimal (typically from $20 to $100) compared to what you are going to spend. Sometimes you can get pre-approved on the same day or the next day. Your lender should provide you with a written letter or certificate of pre-approval. Note the distinction here between pre-qualification and pre- approval. Pre-qualification is simply an estimate of what you should be spending on your monthly housing expense based on your income to debt ratio. This can be done by anyone who is familiar with basic finance concepts (like your Realtor). An actual pre-approval can only be accomplished by the lender by verifying your complete income, debt, and credit profile, to include obtaining a certified credit report. You are going to have to do this anyway – why not go ahead and get it done first?

Once you are pre-approved you know exactly how much house you can buy. Again, you don’t have to spend that much, but at least you know that you can, if you want to. Most importantly, the pre-approved status can put you in a position of greater strength when it comes time to make an offer and negotiate on the home you want to buy. Think about it from the seller’s point of view. When they receive an offer on their house, if they have written proof that the buyers are actually already approved for their loan, they can be confident that they have serious buyers who will not have to back out of the contract because they couldn’t obtain the necessary financing. They may even be willing to negotiate a lower sale price or more favorable terms in some other way – simply because you come to them pre- approved!

And, by the way, once you have gotten pre-approved and all the way through the home buying process, until final closing and recordation, it is important that you avoid doing anything that could adversely affect your credit status. It is best not to purchase anything of significance like appliances or especially something large, like an automobile. Don’t run your credit card bills up any higher than normal. Make all of your existing debt payments on time and in full. Additionally, any transfers of significant amounts into or out of any of your money accounts will be subject to close scrutiny. If you are going to be receiving money (either as a loan or a gift) from parents or someone else to help with the down payment, it will have to be fully documented and disclosed.

Buyer Brokerage Agreement

What is a buyer’s broker? First it is important to understand the legal concept of agency. Agency is the legal relationship created by a principal (either a Seller or a Buyer) and a real estate broker (to include any associate licensee of that broker, often called agents or salespersons) when they have chosen that broker to act on their behalf, or under their control, in business or financial transactions and in this case, the buying of real estate. Further, by law, agency creates a fiduciary relationship (as discussed above) with certain duties, obligations and high standards of trust, good faith, and loyalty. Note that the payment of a fee or commission does not create this agency.

In many parts of the country, still today, real estate agents only have an express agency relationship with the sellers of real estate – not the buyers. This is true because the only written agency agreements have typically been the Listing Agreements for the sale of property. In many parts of the country, when a buyer engages a real estate agent to help them find and purchase property, they typically do not execute a Buyer Broker Agreement and therefore do not have an expressed agency relationship.

In other words, real estate agents actually only work for the sellers – whether it was their listing or not. Buyers could not be treated as clients, only as customers. This is an important distinction – and one that many people have not really understood.

Seller agency is created when a Listing Agreement is completed on a property for sale. Buyer agency is created when a Buyer Broker Agreement is completed with the intent of purchasing property. And, dual agency can be acknowledged and permitted by either type of agreement.

To establish a strong buyer agency relationship, a Buyer-Broker Exclusive Employment Agreement should be executed. It details the understanding and responsibilities between the buyer and the broker they choose to represent them. And, in addition to establishing a legal agency relationship for the benefit of the buyer, it provides the real estate agent with a commitment on the part of the buyer to work exclusively with them and promise loyalty as well.

Though it is well known that the public perception of real estate agents rarely ranks much higher than that of lawyers, the truth is that a competent real estate agent is an invaluable resource when buying a home. Good real estate agents work very hard – much harder than most people realize. They spend lots of time, energy, and money helping home buyers in locating the right house, negotiating its purchase, providing expert advice, completing mountains of paperwork and, bringing the transaction to a close. There is a lot of responsibility and liability associated with this business. The average homebuyer is probably unaware of the education, skill, effort and expense it really takes to consummate a real estate transaction.

Real estate agents (with very, very rare exception) are only compensated by commission. Most of the time, that commission is paid for by the sellers of real estate to the listing broker who then cooperates with and pays the selling broker (the buyers’ broker) an agreed upon share of the listing commission. And though those commissions may appear to be pretty lucrative at face value (e.g., a 3% selling commission on a $250,000 sale is $7,500), the truth is there are a lot of significant expenses that come out of that amount beyond the gasoline and auto expense in showing houses to buyers.

Real estate agents are typically not really employees – they are independent, licensed contractors with a real estate company. In one way or another – directly or indirectly through fees or commission sharing with their company, they pay all of the expense associated with being in business. All of the overhead expense of having an office, all of the office furniture, equipment, supplies, staff, phones, computers, etc., etc., etc. There are lots of other administrative costs: continuing education, professional fees, licensing expense, and medical insurance. Not unlike with other professionals, the cost of errors and omissions insurance (a type of liability coverage) has become absolutely obscene. Let’s not forget about all of the ordinary day-to-day expense of having a suitable vehicle, its operation, maintenance and insurance, office equipment, telephones, copy machines, fax machines, computers, internet service, MLS membership and service, proper wardrobe, advertising, etc., etc. It really is very expensive to be in this business.

Now, consider the way some prospective buyers want to treat real estate agents. They want to have the agent show them properties, drive all over town, be available both day and night, seven days a week, answer any and all questions, give advice, buy them lunch, and provide any number of other services. Some people schedule appointments they do not keep. Others are constantly late. The truth is, you may not believe some of the stories to be told. Sometimes people have all of this done even when they do not have a realistic expectation or capability to buy a home. Or, after months of looking with an agent, the buyers will walk into a new home subdivision and purchase a home without even telling them. Or, buy a For Sale By Owner (FSBO) house without using the agent. There are all kinds of ways that real estate agents get left with nothing but a pile of expenses and with no compensation at all. Another classic example is when the buyers use the services of an agent, maybe for weeks or months – and they finally find the house they want. Then, their cousin calls and says he has just gotten his real estate license and needs their help.

Professional real estate agents have learned that buyers who are sincere in their interest to purchase a home with capable assistance are more than willing to make a commitment to their agent. This can only properly be done with a Buyer-Broker Exclusive Employment Agreement.

Another aspect about all of this is to understand is that, with new home subdivision sales, the salespeople that work there, work for the builder or developer exclusively. They do not represent the buyers. They may make you feel like you are their primary interest by being so nice and charming – but they have no obligation to you as a client. You will be completely unrepresented. If you are interested in looking at new home subdivisions, simply let your agent know and they should be glad to take you there and show you the properties. They will protect your interests just as on the purchase of any resale property. Most builders / developers will cooperate with buyer brokers and pay them a commission – on one condition: that the agent physically accompanies the buyers on at least the initial visit and properly registers with them. Otherwise, many developers will not compensate outside agents.

Here’s yet another possibility to consider. Let’s assume you are out driving around one day by yourself and you happen to see a new home subdivision or a FSBO that looks interesting to you. You decide to stop and take a look. If you do not tell the selling party that you are working with an agent and have an exclusive agreement with them, the seller is pretty unlikely to be willing to cooperate later.

Look, it comes down to this one point. If it is reasonable for you to expect that a real estate professional is supposed to do everything possible in your best interest, then shouldn’t you be willing to commit to protecting their interests? And, promising your loyalty to help ensure that they get properly compensated?

Should you enter into a Buyer- Broker Agreement hurriedly? Absolutely not! Take your time, interview different agents. Find one that you feel is competent and that you are compatible with. Make sure the agent has the time available to work with you on your schedule. Have a full and open

discussion about what you want and how the agent works. What are their credentials? Ask all the questions you want – you should feel comfortable with all of the answers.

Now, let’s look at what is in this agreement specifically:

• The parties are identified – the buyers and the real estate broker.
• A broker (agent) is employed and granted irrevocable right to locate property and negotiate terms and conditions acceptable to the buyer.
• A general description of the type of property of interest is provided.
• The term or length of the agreement is identified, noting that any release from this agreement must be mutually agreed upon.
• An acknowledgment is made about all compensation.
• Provision for an optional retainer fee is made and determined.
• A specific provision regarding protection in new home sales situations is identified.
• Permission to work with other buyers for the same kinds of properties is granted to the broker.
• Buyer duties are identified.
• Broker duties are identified.

A statement is made about the requirement to abide by all local, state, and federal laws prohibiting discrimination related to racial, ethnic, or religious, or disability consideration.It is all actually pretty straightforward and reasonable. It is the best way to deal with your agent. When you make the agent feel comfortable about your intentions – it is almost inevitable that they will do a better job for you.

Finally! We Are Ready To Start Looking – Almost.

Now you are almost ready to start looking. You probably have some idea in mind of at least some of your criteria – other things you may not know until you start looking and getting a feel for how much the houses you like cost and what the various amenities do to the price.

Please understand that almost everyone wants to find their “dream home” or have everything “perfect”. This goal is seldom possible. For whatever reason, we all seem to have champagne tastes with a beer budget – to one degree or another.

There really are many factors to consider. Try rating each of the following criteria on a scale of 1 to 10, with a rating of:

Just go with what you think now.

LOCATION: ________ PRICE: ________

APPEARANCE: ________ CONDITION: ________

fixer upper OK? _________
what part of town? _______________________________
proximity to? _____________, within ______ miles of _____________ nearby facilities that are important? ___________________________

schools _____, church _____, shopping _____, recreation _____ gated community? __________
parking? garage _______, carport ________, other _______
type of cooling? AC ______, Evaporative Cooler _____________ type of heating? Gas ______, Electric _______________

type of stove? Gas ______, Electric _______________
fireplace? __________
sewer connection? ______________, septic tank? _____________
city water? ______________, well water? ______________
homeowner association? ______________
monthly dues? ______________
pets?, horses? ________________________________________ parking restrictions? ________________________________________ other???????
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